{"id":20728,"date":"2011-04-20T15:30:52","date_gmt":"2011-04-20T19:30:52","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=20728"},"modified":"2011-04-20T15:30:52","modified_gmt":"2011-04-20T19:30:52","slug":"learning-economics-from-a-pencil","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/04\/20\/learning-economics-from-a-pencil\/","title":{"rendered":"Learning Economics from a Pencil"},"content":{"rendered":"

Learning Economics from a Pencil<\/strong><\/a><\/span><\/p>\n

We always enjoy reading the mainstream press reaction after the Reserve Bank of Australia (RBA) releases the minutes of its monthly meetings.<\/p>\n

There\u2019s inevitably talk about how the RBA thinks current rates are \u201cappropriate\u201d<\/em>, and how the RBA is going to \u201csteer the narrative back towards the big story\u201d<\/em> \u2013 whatever that means.<\/p>\n

It\u2019s the whole idea the RBA is driving the Australian economy.\u00a0 That without its influence you, I and the entire economy would be flailing around like one of those inflatable waving arm guys you see by the side of the road:<\/p>\n

Inflatable man or directionless economy?<\/strong><\/p>\n

I mean, really, would the economy be in such a muddle if the RBA didn\u2019t exist?<\/p>\n

Of course not.\u00a0 People and businesses don\u2019t need a central economic command post calling all the shots.<\/p>\n

Take the above photo as an example.<\/p>\n

Your editor asked the guys in the editorial office what these things were called.\u00a0 Because we didn\u2019t know, we had to insanely wave our arms around like a madman.<\/p>\n

But they got the idea.<\/p>\n

Two suggestions were \u201cinflatable waving man\u201d and \u201cinflatable doll thing\u201d.\u00a0 Being at work, we were reluctant to type \u201cinflatable doll\u201d into the old search engine for fear of what we\u2019d get!\u00a0 So we went with the former.<\/p>\n

No sooner had we typed \u201cinflatable waving\u2026\u201d into the search engine, than Google gave suggestions of what we were after \u2013 \u201cinflatable waving arm guy\u201d seemed the closest match and Bob\u2019s your uncle.<\/p>\n

It\u2019s a perfect example of how a free market economy works.\u00a0 There\u2019s no directive or law passed by government instructing Google to offer search suggestions.<\/p>\n

Google does it because it\u2019s helpful.\u00a0 Because it\u2019ll help searchers find what they\u2019re looking for, and potentially \u2013 shock, horror \u2013 result in Google making more advertising money.<\/p>\n

Not only that, but there\u2019s no regulation or decree from government mandating that a photo of an \u201cinflatable waving arm guy\u201d be made available on the Internet.\u00a0 It\u2019s just there.\u00a0 For whatever reason, it\u2019s there.<\/p>\n

That\u2019s how markets work.<\/p>\n

Steering through a crossroads<\/strong><\/p>\n

Besides, can you imagine a government bureaucrat sitting in an office having to think of every possible thing someone may want to search for?\u00a0 It\u2019s not possible \u2013 even for a super-brainy pen pusher.<\/p>\n

Anyway, back to central banking.\u00a0 Our old pal, the Sydney Morning Herald<\/em>\u2019s, Jessica Irvine wrote this just over a week ago:<\/p>\n

\u201cGlenn Stevens is going to have to work for every dollar of his $1 million-plus pay packet this year.\u00a0 The Australian economy is at a crossroads, as a resurgent mining boom fires up parts of the economy but inflicts pain on others.<\/em><\/p>\n

\u201cThe task of steering the economy through this intersection is made all the more difficult by this year\u2019s cyclones, floods and earthquakes, which play havoc with official jobs, economic growth and retail figures.\u00a0 Setting interest rates is often likened to driving a car by only looking in the rear-view mirrors, thanks to the uncertainty of the future and inevitable time delays in collecting and publishing of historic economic data.\u201d<\/em><\/p>\n

There you have it, the RBA has the \u201ctask of steering the economy\u2026\u201d<\/em><\/p>\n

To be honest, we pity the entire thought process of those who believe in the omnipotence of bureaucrats.<\/p>\n

There\u2019s the old saying of \u201cthose who can, do; those who can\u2019t, teach.\u201d<\/em> But we never use it.\u00a0 Mainly because \u2018er indoors and half the in-laws are teachers.\u00a0 Besides, it could just as easily be said that \u201cthose who can, do; those who can\u2019t, write financial newsletters!\u201d<\/em><\/p>\n

But either way, the more appropriate saying would be, \u201c\u2026those who can\u2019t, become bureaucrats and central bankers.\u201d<\/em><\/p>\n

The idea the likes of Glenn Stevens, Dr. Ben S. Bernanke, Mervyn King or Jean-Claude Trichet are able to accurately \u201csteer\u201d an economy like a driver steers a car is ridiculous.\u00a0 It can\u2019t be done.<\/p>\n

Why?<\/p>\n

Because of the vast number of moving parts in an economy.\u00a0 It\u2019s impossible for a central banker to move an interest rate and for it to have a uniform impact on an economy.<\/p>\n

Let me give you another example.\u00a0 Whenever we read articles such as Ms. Irvine\u2019s we laugh.\u00a0 But when we recover, we head directly for a particular essay.<\/p>\n

I am a pencil<\/strong><\/p>\n

It\u2019s only a short essay, something you should be able to read in less than fifteen minutes.\u00a0 It was written in 1958 by a chap called Leonard E. Read.\u00a0 The title is: I, Pencil.<\/em><\/p>\n

You can click here<\/a> to read it in full now.<\/p>\n

The essay relates a first \u201cperson\u201d account from a pencil\u2019s point of view \u2013 crazy huh?!\u00a0 The pencil explains what goes in to making a pencil\u2026 from the woodchoppers in Oregon to the graphite mines in Ceylon (Sri Lanka) to the rape-seed oil from the Dutch East Indies (Indonesia).<\/p>\n

None of those hundreds of firms or thousands of people were directed to make a pencil by a central planner.\u00a0 In fact, in most cases they probably don\u2019t even know or care what the graphite or rape-seed is used for.<\/p>\n

Leonard Read writes:<\/p>\n

\u201cI, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove\u2026<\/em><\/p>\n

\u201cSimple?\u00a0 Yet, not a single person on the face of this earth knows how to make me.\u00a0 This sounds fantastic, doesn\u2019t it?\u00a0 Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.\u201d<\/em><\/p>\n

The point is, that simple as a pencil seems, it\u2019s impossible for a single person to possess the knowledge, the skill and the resources to single-handedly make a pencil.\u00a0 And neither would you want to when you can buy a whole box of the things for a couple of bucks.<\/p>\n

That\u2019s the beauty of the division of labour.\u00a0 There\u2019s no need to gain the skills to do everything when others can specialise in specific skills that go towards making the end product.<\/p>\n

As Milton Friedman points out in his introduction to the essay:<\/p>\n

\u201cIt is even more astounding that the pencil was ever produced.\u00a0 No one sitting in a central office gave orders to these thousands of people.\u00a0 No military police enforced the orders that were not given.\u00a0 These people live in many lands, speak different languages, practice different religions, may even hate one another \u2013 yet none of these differences prevented them from cooperating to produce a pencil.\u201d<\/em><\/p>\n

The reality is an economy doesn\u2019t need a central bank to interfere.\u00a0 Things just happen.<\/p>\n

We\u2019re often asked, \u201cHey wise guy, you say the government shouldn\u2019t provide health, education, police and stuff, so how would it work then eh?\u201d<\/em><\/p>\n

In all honesty, we don\u2019t know for certain.\u00a0 But we know private health, private education and private security are already provided by the free market.\u00a0 Do we really need to stretch our imagination so far to think these things are possible without government interference?<\/p>\n

Free food or free health<\/strong><\/p>\n

To those who say only the government can provide health and education, we say, which is more important to your survival, food or education?\u00a0 The answer is obvious, yet government doesn\u2019t mandate free food for all.<\/p>\n

The entire population isn\u2019t starving because the government has failed to provide free food.\u00a0 Yet somehow we all manage to eat.\u00a0 How is that possible without government intervention?<\/p>\n

It\u2019s possible because of markets.<\/p>\n

Think about that the next time you buy something you want from a shop.\u00a0 Why does the local milk bar stock cans of soft drink and packets of chips?\u00a0 Is it because the RBA has steered the economy that way?<\/p>\n

No, it\u2019s because the milk bar owner judges that based on past buying patterns and customer demand, people will continue to make these purchases.<\/p>\n

If anything, the central bankers can only steer an economy in the wrong direction.\u00a0 As central banks the world over (including the RBA) have done by keeping interest rates low.<\/p>\n

The fact is, central bankers are bad drivers.<\/p>\n

Look at how the US Federal Reserve has steered the US economy.<\/p>\n

Or how the Bank of England and European Central Bank have steered those economies.<\/p>\n

Now, don\u2019t fall into the trap of blaming everything on the private banks for creating all the toxic derivatives.\u00a0 Sure, they\u2019re to blame for financial manipulation.<\/p>\n

But the banks could only create those toxic derivatives and manipulate the market due to the presence and approval of the central banks and government.<\/p>\n

What about the RBA?\u00a0 Is it doing any better?<\/p>\n

Steering the economy into a ditch<\/strong><\/p>\n

If you read the mainstream financial numpties you\u2019d think the RBA are a breed apart in terms of economic \u201csteering\u201d.\u00a0 You\u2019d think the pen pushers at the RBA are the Michael Schumacher of the central banking world.<\/p>\n

But as we\u2019ve pointed out before \u2013 which even the mainstream admits \u2013 the Australian economy isn\u2019t in as good a shape as you\u2019re led to believe.<\/p>\n

A couple of weeks ago we pointed out that for the last financial year all the profit growth for the top twenty Australian listed companies came from the resources and banking sector.<\/p>\n

The rest \u2013 the retailers, manufacturers, services companies \u2013 had seen profits drop.<\/p>\n

If the RBA was so good at driving the economy in the right direction then how come all but the resources and banking sector are taking a hit to the bottom line?\u00a0 It doesn\u2019t make sense does it?<\/p>\n

Right now your editor is reading up on the real heroes of the economy \u2013 entrepreneurs \u2013 for the April issue of Australian Small-Cap Investigator<\/a><\/strong><\/em>.<\/p>\n

Entrepreneurs are people who come up with ideas.\u00a0 They pitch these ideas to capitalists (investors) who then decide if the idea makes sense.\u00a0 If it does, they invest.\u00a0 If it doesn\u2019t, they don\u2019t.<\/p>\n

The entrepreneurs, capitalists and individuals are the true drivers of the economy.\u00a0 And only they can steer it in the right direction.<\/p>\n

Unfortunately for the economy, you\u2019ve got central bankers putting up signs trying to point you in the wrong direction.\u00a0 In other words, an economy grows in spite of central bank intervention, not because of it.<\/p>\n

Cheers.<\/p>\n

Kris Sayce
\n<\/strong>Money Morning Australia<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

We always enjoy reading the mainstream press reaction after the Reserve Bank of Australia (RBA) releases the minutes of its monthly meetings. There\u2019s inevitably talk about how the RBA thinks current rates are \u201cappropriate\u201d, and how the RBA is going to \u201csteer the narrative back towards the big story\u201d \u2013 whatever that means.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-20728","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/20728","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=20728"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/20728\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=20728"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=20728"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=20728"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}